Objective information about retirement, financial planning and investments

Charitable Giving and Tax Reform

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The Tax Cuts and Jobs Act passed in December of 2017 marks the biggest overhaul in the tax code in many years. One area that will be impacted under tax reform is charitable giving.

While charitable contributions remain eligible as an itemized deduction under tax reform, the ability to actually deduct your contributions may have been impacted by some changes in in the rules. Here are some thoughts for this holiday season and throughout the year.

SALT Cap

SALT stands for state and local taxes. Tax reform capped the amount of these taxes that can be used as an itemized deduction at $10,000 for 2018 going forward. The two biggest SALT components for most people are their state income taxes and their property taxes. This will especially impact those people living in states with high income taxes and locations with high property values/property taxes. Many commentators say this was politically motivated since taxpayers in “blue states” seem to be disproportionately impacted, I’ll leave that to you the reader to decide.

Higher standard deduction

The other major change that may impact your ability to itemize deductions is the increase in the standard deduction. Starting in 2018, the standard deduction increases to $24,000 for those who are married filing jointly and $12,000 for single filers. This means that if your itemized deductions are less than these thresholds, you will be better off taking the standard deduction versus itemizing.

Note that these and most provisions under tax reform expire after the 2025 tax year, so we will see what the future holds for these and other provisions beyond that. 

Deductibility of charitable contributions under tax reform 

The deductibility of charitable contributions was not eliminated under tax reform, in fact it was expanded for some high-income taxpayers. The issue for many taxpayers is whether or not they can still itemize deductions with the changes to the standard deduction limits and the SALT cap discussed above.

For those whose situation might not allow them to itemize, here are some ways to make your charitable giving more tax-efficient.

Bunch contributions

Let’s say that you and your spouse file a joint return. In this example let’s say your mortgage interest is $10,000 for the year and your SALT taxes are capped at the $10,000 level. With other deductible expenses your itemized deductions would come to $21,500, leaving you $3,500 short of the $24,000 standard deduction threshold.

One option would be to bunch expenses that would qualify as itemized deductions into 2018 (or any appropriate year) to get over the $24,000 hurdle.

In the case of charitable contributions, you might consider making additional contributions in the current tax year to help your reach the threshold where you can itemize. If you normally would make contributions of $1,500 per year and can afford to do so, you might try to make 2-3 years’ worth of contributions to the organizations of your choice in the current year to get your deductions above the threshold.

Give appreciated securities or assets 

Using appreciated securities held in a taxable account to make charitable contributions has long been an excellent method to make charitable contributions. Stocks, mutual funds and ETFs that have appreciated in value are good gifts. Other types of appreciated assets can be used as well, such as art, collectibles and real estate. These types of assets will need to have an appraisal to determine their value as a gift, versus using the market value on the day of the gift for appreciated securities.

There are two potential benefits:

  • The value of the gift can be deducted as a charitable contribution for those who can itemize deductions.
  • There are no capital gains taxes that will be due on the contributed shares. If you were to sell the shares first and then contribute the cash, you would owe capital gains taxes on the amount of the realized gain on the sale.

This strategy can also be used as part of your overall portfolio rebalancing, it can be a tax-efficient way to rebalance your holdings.

Even for those who cannot itemize under the new rules, the benefit of not having to pay taxes on the capital gains can be a significant benefit.

If you have a security that has declined in value, you are generally better off selling it, realizing a loss on the sale and then contributing the cash.

If this is a route that is appropriate for you, be sure to contact the organization to ensure that they can accept gifts of appreciated securities or other types of assets.

Donor-advised funds 

A donor-advised fund is a fund that allows you to have your contributions to the fund professionally managed, offering the opportunity to make contributions to qualified charitable organizations over time. DAFs have been around for many years and are offered by such big-name financial services organizations like Vanguard, Schwab and Fidelity among others.

After establishing your account, contributions to the DAF can be made via check, securities or other assets. The details may vary a bit from fund to fund.

The fund invests your contributions professionally, typically through a list of individual funds or several managed portfolios they might offer. The money grows, and contributions can be made over time to the organization(s) of your choosing, as long as they are qualified charities. Most DAFs have minimum initial and future contribution levels, as well as minimum donation levels.

DAFs fit well into the new tax environment in that they can accept appreciated securities and can be a great vehicle to bunch your contributions in order to be able to itemize in certain years. They also allow you to space out your charitable donations if your desire is to give a certain amount each year.

RMD – Qualified Charitable Distribution (QCD) 

For those who are age 70 ½ or older, you can direct some or all of your required minimum distribution (RMD) to a qualified charitable organization each year in what is called a qualified charitable distribution (QCD). The limit is $100,000 annually.

The QCD has been around for a number of years. The amount directed to the charity is not taxed. This is beneficial for many reasons, including keeping your income in a range that offers the lowest future Medicare costs.

The amount of the QCD does not qualify as a deductible charitable contribution. If you have charitable intentions, this can be a tax-efficient way to make charitable.

The Bottom Line 

Contributing to charity is a great thing to do for those of us who are able to do it. As a Jesuit priest told me back in my graduate school days at Marquette University, you might as well take any tax breaks possible when making donations. The ideas above can help make your contributions a bit more tax-efficient.

As with any tax or financial planning issue, be sure to consult with a qualified tax or financial professional to determine if these ideas make sense for your situation.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

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Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

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One of the best tax deductions for a small business owner is funding a retirement plan. Beyond any tax deduction you are saving for your own retirement.  As a fellow small business person, I know how hard you work.  You deserve a comfortable retirement. If you don’t plan for your own retirement who will? Two popular small business retirement plans are the SEP-IRA and Solo 401(k).

Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

SEP-IRA vs. Solo 401(k)

SEP-IRA Solo 401(k)
Who can contribute? Employer contributions only. Employer contributions and employee deferrals.
Employer contribution limits The maximum for 2018 is $55,000 and increases to $56,000 for 2019. Contributions are deductible as a business expense and are not required every year. For 2018, employer plus employee combined contribution limit is a maximum of 25% of compensation up to the maximums are $55,000 and $61,000, respectively. For 2019 these limits increase to $56,000 and $62,000. Employer contributions are deductible as a business expense and are not required every year.
Employee contribution limits A SEP-IRA only allows employer contributions. Employees can contribute to an IRA (Traditional, Roth, or Non-Deductible based upon their individual circumstances). $18,500 for 2018. An additional $6,000 for participants 50 and over. In no case can this exceed 100% of their compensation.The limits for 2019 increase to  $19,000 and $25,000 respectively.
Eligibility Typically, employees must be allowed to participate if they are over age 21, earn at least $600 annually, and have worked for the same employer in at least three of the past five years. No age or income restrictions. Business owners, partners and spouses working in the business. Common-law employees are not eligible.

Note the Solo 401(k) is also referred to as an Individual 401(k).

  • While a SEP-IRA can be used with employees in reality this can become an expensive proposition as you will need to contribute the same percentage for your employees as you defer for yourself. I generally consider this a plan for the self-employed.
  • Both plans allow for contributions up your tax filing date, including extensions for the prior tax year. Consult with your tax professional to determine when your employee contributions must be made. The Solo 401(k) plan must be established by the end of the calendar year.
  • The SEP-IRA contribution is calculated as a percentage of compensation. If your compensation is variable the amount that you can contribute year-to year will vary as well. Even if you have the cash to do so, your contribution will be limited by your income for a given year.
  • By contrast you can defer the lesser of $18,500 ($24,500 if 50 or over) or 100% of your income for 2018 and $19,000/$25,000 for 2019 into a Solo 401(k) plus the profit sharing contribution. This might be the better alternative for those with plenty of cash and a variable income.
  • Loans are possible from Solo 401(k)s, but not with SEP-IRAs.
  • Roth feature is available for a Solo 401(k) if allowed by your plan document. There is no Roth feature for a SEP-IRA.
  • Both plans require minimal administrative work, though once the balance in your Solo 401(k) account tops $250,000, the level of annual government paperwork increases a bit.
  • Both plans can be opened at custodians such as Charles Schwab, Fidelity, Vanguard, T. Rowe Price, and others. For the Solo 401(k) you will generally use a prototype plan. If you want to contribute to a Roth account, for example, ensure that this is possible through the custodian you choose.
  • Investment options for both plans generally run the full gamut of typical investment options available at your custodian such as mutual funds, individual stocks, ETFs, bonds, closed-end funds, etc. There are some statutory restrictions so check with your custodian.

Both plans can offer a great way for you to save for retirement and to realize some tax savings in the process. Whether you go this route or with some other option I urge to start saving for your retirement today 

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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4 Things To Do When The Stock Market Drops

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Today the stock market took another hit. The Dow Jones Industrial Average fell over 799 points or about 3.1%. The S&P 500 lost over 3.2%. An inverted yield curve, often a precursor to a recession, continued concerns about a trade war with China and concerns about Apple’s future outlook all fueled investor concerns. On top of this the stock market is closed tomorrow due to a national day of mourning for former President Bush, making many investors fearful of being long on stocks going into this midweek closure. What should you do now? Here are 4 things to consider when the stock market drops.

4 Things to do When the Stock Market Drops

Breathe 

Cable news networks like CNBC have a field day during steep, sudden stock market corrections like we saw today. It’s easy to get caught up in all of this hype. Don’t let yourself be sucked in.

Step back, take a deep breath and relax.

Take stock of where you are 

Review your accounts and assess the extent of the damage that has been done. Depending upon how you are invested it may be minor or a bit more significant. Investors who are well-diversified have probably been hurt but not to the extent of those with a heavy allocation to equities and other volatile areas that have been hit.

Review your asset allocation 

Has your portfolio weathered this storm and the declines we saw earlier in the year as you would have expected? If so your allocation is likely appropriate. If not, then perhaps it is time to review your asset allocation and make some adjustments. Proper diversification is great way to reduce investment risk. This is a good time to rebalance your portfolio back to your target asset allocation if needed as well.

Go shopping 

Market declines can create buying opportunities. If you have some individual stocks, ETFs or mutual funds on your “wish list” this is the time to start looking at them with an eye towards buying at some point. It is unrealistic to assume you will be able to buy at the very bottom so don’t worry about that.

Before making any investment be sure that it fits your strategy and your financial plan. Also make sure the investment is still a solid long-term holding and that it is not cheap for reasons other than general market conditions.

The Bottom Line 

Steep and sudden stock market declines can be unnerving. Don’t panic and don’t let yourself get caught up in all of the media hype. Stick to your plan, review your holdings and make some adjustments if needed. Nobody knows where the markets are headed but those who make investment decisions driven by fear usually regret it.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

7 Tips to Become a 401(k) Millionaire

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According to Fidelity, the average balance of 401(k) plan participants stood at $104,000 at the end of the second quarter of 2018, just shy of the all-time high level of $104,300 at the end of 2017. This data is from plans using the Fidelity platform.

They indicate that about 168,000 participants had a balance of $1 million, which is about 41 percent higher than a year earlier. What is their secret?  Here are 7 tips to become a 401(k) millionaire or to at least maximize the value of your 401(k) account.

Be consistent and persistent 

Investing in your 401(k) plan is more of a marathon than a sprint.  Maintain and increase your salary deferrals in good markets and bad.

Contribute enough 

In an ideal world every 401(k) investor would max out their annual salary deferrals to their plan which are currently $18,500 and $24,500 for those who are 50 or over. These amounts increase to $19,000 and $25,000 for 2019.

If you are just turning 50 this year or if you are older be sure to take advantage of the $6,000 catch-up contribution that is available to you. Even if your plan limits the amount that you can contribute because of testing or other issues, this catch-up amount is not impacted. It is also not automatic so be sure to let your plan administrator know that you want to contribute at that level. 

According to a Fidelity study several years ago, the average contribution rate for those with a $1 million balance was 16 percent. According to their most recent data, the average contribution across all 401(k) investors they surveyed was about 8.6 percent. The 16 percent contribution rate translated to a bit over $21,000 for the millionaire group.

As I’ve said in past 401(k) posts on this site, it is important to contribute as much as you can. If you can only afford to defer 3 percent this year, that’s a start. Next year try to hit 4 percent or more. As a general rule it is a good goal to contribute at least enough to earn the full match if your employer offers one.

Take appropriate risks 

As with any sort of investment account be sure that you are investing in accordance with your financial plan, your age and your risk tolerance.  I can’t tell you how many times I’ve seen lists of plan participants and see participants in their 20s with all or a large percentage of their account in the plan’s money market or stable value option.

Your account can’t grow if you don’t take some risk.  

Don’t assume Target Date Funds are the answer 

Target Date Funds are big business for the mutual fund companies offering them. They also represent a “safe harbor” from liability for your employer. I’m not saying they are a bad option but I’m also not saying they are the best option for you.

I like TDFs for younger investors say those in their 20s who may not have other investments outside of the plan. The TDF offers an instant diversified portfolio for them.

Once you’ve been working for a while you should have some outside investments. By the time you are say in your 40s you should consider a more tailored portfolio that fits you overall situation.

Additionally Target Date Funds all have a glide path into retirement. They are all a bit different, you need to understand if the glide path offered by the TDF family in your plan is right for you. 

Invest during a long bull market 

This is a bit sarcastic but the bull market for stocks that started in March of 2009 is in part why we’ve seen a surge in 401(k) millionaires and in 401(k) balances in general. The equity allocations of 401(k) portfolios have driven the values higher.

The flip side are those who swore off stocks at the depths of the 2008-2009 market downturn have missed one of the better opportunities in history to increase their 401(k) balance and their overall retirement nest egg.

Don’t fumble the ball before crossing the goal line 

We’ve all seen those “hotdogs” running for a sure touchdown only to spike the ball in celebration before crossing the goal line.

The 401(k) equivalent of this is to just let your account run in a bull market like this one and not rebalance it back to your target allocation. If your target is 60 percent in stocks and it’s grown to 80 percent in equities due to the run up of the past few years you might well be a 401(k) millionaire.

It is just as likely that you may become a former 401(k) millionaire if you don’t rebalance.  The stock market has a funny way of punishing investors who are too aggressive or who don’t manage their investments.

Pay attention to those old 401(k) accounts 

Whether becoming a 401(k) millionaire in your current 401(k) account or combined across several accounts, the points mentioned above still apply. In addition it is important to be proactive with your 401(k) account when you leave a job.  Whether you roll the account over to an IRA, leave it in the old plan or roll it to a new employer’s plan if allowed do something, make a decision.  Leaving an old 401(k) account unattended is wasting this money and can be a huge detriment to your retirement savings efforts.

The Bottom Line 

Whether you actually amass $1 million in your 401(k) or not, the goal is to maximize the amount accumulated there for retirement.  The steps outlined above can help you to do this. Are you ready to start down the path of becoming a 401(k) millionaire?

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

6 Investment Expenses You Need to Understand

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Investment expenses reduce your investment returns. While nobody should expect investment managers, financial advisors or other service providers to offer their services for free, investors should understand all costs and fees involved and work to reduce their investment expenses to the greatest extent possible.

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Here are 6 investment expenses you need to understand in order to maximize your returns.

Mutual fund and ETF expense ratios

All mutual fund and ETFs have expense ratios. These fees cover such things as trading costs, compensation for fund managers and support staff and the fund firm’s profit. Expense ratios matter and investors shouldn’t pay more than they need to.

Vanguard’s site, as you might expect, deals with this topic at length. In one example, it shows the impact of differing levels of fees on a hypothetical $100,000 initial account balance over 30 years with a yearly return of 6%. After 30 years the balance in the account would be:

$574,349 with no investment cost

$532,899 with an investment cost of 25 basis points

$438,976 with an investment cost of 90 basis points

These numbers clearly illustrate the impact of fund fees on an investor’s returns and their ability to accumulate assets for financial goals like retirement and funding their children’s college educations.

Mutual fund expense ratios are an example of where paying more doesn’t get you more. Case in point, Vanguard Value Index Adm (VVIAX) has an expense ratio of 0.05%. The Morningstar category average for the large cap value asset class is 1.03%. For the three years ending September 30, 2018 the fund ranked in the top 10% of all funds in the category; for the trailing five years it placed in the top 6% and for the trailing ten years it placed in the top 24% in terms of investment performance.

Sales loads and 12b-1 fees

Front-end sales loads are an upfront payment to a financial advisor or registered rep. Front-end sales loads reduce the amount of your initial investment that actually goes to work for you. For example, if a rep suggests investing in a mutual fund like the American Funds EuroPacific Growth A (AEPGX) for every $10,000 the investor wants to invest, $575 or 5.75% will be deducted from their initial investment balance to cover the sales load. Over time this will reduce the investor’s return versus another version of the same fund with a similar expense ratio that doesn’t charge a sales load.

Some will argue that this load is a one-time payment to the advisor and their firm for their advice. This strikes me as dubious at best, but investors need to decide for themselves whether the advice received in exchange for paying a sales load warrants this drain on their initial and subsequent investments. This share class has an expense ratio of 0.82% which includes a 12b-1 fee of 0.24% (see more on 12b-1 fees below).

Level loads are associated with C shares. The American Funds EuroPacific Growth C (AEPCX) fund has a level load of 1% in the form of a 12b-1 fee and an overall expense ratio of 1.60%. Brokers and registered reps love these as the level load stays in place for ten years until the funds convert to a no-load share class of the fund. There is a 1% surrender charge if the fund is redeemed within the first year of ownership.

12b-1 fees are a part of the mutual fund’s expense ratio and were originally designated to be marketing costs. They are now used as trialing compensation for financial advisors and reps who earn compensation from selling investment products. They can also be used to provide revenue-sharing in a 401(k) plan. While 12b-1 fees don’t increase expenses as they are part of the fund’s expense ratio, typically funds with a 12b-1 fee will have a higher expense ratio than those that don’t in my experience.

401(k) expenses

For many of us our 401(k) plan is our primary retirement savings vehicle. Beyond the expense ratios of the mutual funds or other investments offered, there are costs for an outside investment advisor (or perhaps a registered rep or broker who sold the plan) plus recordkeeping and administration among other things. If your employer has these costs paid by the plan they are coming out of your account and reducing the return on your investment.

Be sure to review the annual fee disclosures provided by your employer for your company’s plan for information on the plan’s expenses.

Financial advice fees

Fees for financial advice will vary depending upon the type of financial advisor you work with.

Fee-only financial advisors will charge fees for their advice only and not tied to any financial products they recommend. Fees might be charged on an hourly basis, on a project basis for a specific task like a financial plan, based on assets under management or a flat retainer fee. The latter two options would generally pertain to an ongoing relationship with the financial advisor.

Fee-based or fee and commission financial advisors will typically charge a fee for and initial financial plan and then sell you financial products from which they earn some sort of commission if you choose to implement their recommendations. Another version of this model might have the advisor charging a fee for investment management services, perhaps via a brokerage wrap account, and receiving commissions for selling any insurance or annuity products. They also would likely receive any trailing 12b-1 fees from the mutual funds used in the wrap account or from the sale of loaded mutual funds.

Commissions arise from the sale of financial and insurance products including mutual funds, annuities, life insurance policies and others. The financial advisor is compensated from the sale of the product and in one way or another you pay for this in the form of higher expenses and/or a lower net return on your investment.

Investors need to understand these fees and what they are getting in return. In fact, a great question to ask any prospective financial advisor is to have them disclose all sources of compensation that they will receive from their relationship with you.

Surrender charges

Surrender charges are common with annuities and some mutual funds. There will be a period of time where if the investor tries to sell the contract or the fund they will be hit with a surrender charge. I’ve seen surrender periods on some annuities that range out to ten years or more. If you decide the annuity is not for you or you find a better annuity, the penalty to leave is onerous and costly.

Taxes 

Taxes are a fact of life and come into play with your investments. Investments held in taxable accounts will be taxed as either long or short-term when capital gains are realized. You may also be subject to taxes from distributions from mutual funds and ETFs for dividends and capital gains as well.

Investments held in a tax-deferred account such as a 401(k) or an IRA will not be taxed while held in the account but will be subject to taxes when distributions are taken.

Tax planning to minimize the impact of taxes on your investment returns can help, but investment decisions should not be made solely for tax reasons.

The Bottom Line

Fees and expenses can take a big bite out of your investment returns and your ability to accumulate an amount sufficient to achieve your financial goals. Investors need to understand all costs and expenses associated with their investments and take steps to minimize these costs.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

7 Things to Know About the New Tax Law

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The new tax law (Tax Cuts and Jobs Act) passed in December of 2017 marks the biggest overhaul in the tax code in many years. The impact of these changes is far reaching and will impact most of us in some way.

As we are now over half-way through 2018, this is a good time to look at your tax situation in light of the new tax law and make any necessary adjustments prior to year-end.

Here is a look at seven ways the new tax law may impact you.

1. Lower tax brackets

For most tax payers, the new federal income tax rates will be lower.

Single filers

Tax Rate Income range 2018 taxes Income range 2017 taxes
10% Up to $9,525 Up to $9,325
12% $9,526 to $38,700 NA
15% NA $9,326 to $37,950
22% $38,701 to $82,500 NA
24% $82,501 to $157,500 NA
25% NA $37,951 to $91,900
28% NA $91,901 to $191,650
32% $157,501 to $200,000 NA
33% NA $191,651 to $416,700
35% $200,001 to $500,000 $416,701 to $418,400
37% $500,001 or more NA
39.6% NA $418,401 or more

Source Bankrate.com

Married filing jointly

Tax Rate Income range 2018 taxes Income range 2017 taxes
10% Up to $19,050 Up to $18,650
12% $19,051 to $77,400 NA
15% NA $18,651 to $75,900
22% $77,401 to $165,000 NA
24% $165,001 to $315,000 NA
25% NA $75,901 to $153,100
28% NA $153,101 to $233,350
32% $315,001 to $400,000 NA
33% NA $233,351 to $416,700
35% $400,001 to $600,000 $416,701 to $470,000
37% $600,001 or more NA
39.6% NA $470,001 or more

Source Bankrate.com

As you can see from the bracket in almost every range, the top end of the bracket is a bit higher and generally most income levels are in lower brackets. This means tax savings for most of us starting with the 2018 tax year.

Suggestion – Check the level of taxes being withheld from your paycheck to ensure you don’t come up short and find yourself with a bigger tax bill than you had anticipated.

2. Increased standard deduction

Beginning in 2018, the standard deduction is drastically increased.

  • The standard deduction increases from $6,350 to $12,000 for single filers.
  • The standard deduction increases from $12,700 to $24,000 for those married filing jointly.

This means that fewer people will be able to itemize deductions. It also means that more taxpayers at lower income levels will not owe any taxes.

Partially offsetting the increased standard deduction is the repeal of the personal exemption for 2018. The 2017 amount was $4,050 per eligible dependent, including the tax payer(s). For a family of five, including three dependent children, this would amount to $20,250. The trade-off between the loss of the personal exemption and the increase standard deduction will vary with each person’s situation.

Strategy idea – If the new standard deduction is likely to prevent you from itemizing, it might make sense to bunch deductible expenses into a single tax year, either by accelerating or deferring expenses. Examples of expenses to consider bunching include charitable contributions and eligible medical expenses.

3. SALT reductions

This might be the most controversial provision of the new tax law. SALT stands for state and local taxes. These typically include state and local income taxes as well as property taxes and state sales taxes.

The big change for 2018 is that the deduction for all SALT taxes combined is limited to $10,000. With the higher level of standardized deductions, this limitation may prevent many folks who are used to itemizing deductions from doing so in 2018 and beyond.

For example, if your property taxes are $12,000 annually and your state income tax liability is $8,000, your total deduction for these items will be limited to $10,000. Combined with the higher standard deduction levels you may find yourself unable to itemize deductions going forward.

This provision will likely have the greatest impact in high cost states like California, New York, Illinois, Minnesota and much of the Northeastern part of the country. As many of these are “blue states,” some have speculated that this provision of the new tax law was politically motivated.

Regardless of the motivation, this change is functionally a drop in after-tax income for those impacted. This may be partially offset by the reduced tax brackets and the increase in the standard deduction, but you would be wise to look at your situation as soon as possible to get a true picture of the impact on you.

4. Child tax credit

For families with children, the Child Tax Credit has doubled from $1,000 to $2,000 per child for 2018. Additionally, up to $1,400 of the credit can be refundable if the credit results in a tax refund for you.

The income level at which the credit begins to phase-out has been increased to $400,000 for married couples in 2018, increasing the number of families that will be able to take advantage of this credit. Remember, a tax credit directly reduces the amount of taxes paid and is therefore more valuable than a tax deduction.

The new law also added a $500 credit for other dependent family members, including dependent parents.

As a practical matter, the loss of the personal exemption may offset a portion of the benefit of these increases. There are rules regarding earned income limits and the definition of an eligible child so be sure to understand all the rules and how they might apply to your situation.

5. Retirement plan contributions

Contrary to some earlier versions of the tax bill, the 2018 contribution rates for 401(k) plans, IRAs and other tax-deferred retirement plans was left unchanged. Contributing to a retirement plan provides a tax-break for many and is a great way to save for retirement while your money grows tax-deferred (or tax-free in the case of a Roth account). Be sure to contribute as much as you can for 2018.

6. Mortgage interest deduction

The new tax law limits the amount of mortgage debt against which an interest deduction can be taken. For 2018 and beyond, the ability to deduct mortgage interest is limited to the first $750,000 of mortgage debt. This limit does not apply to mortgages in place prior to 2018.

The ability to deduct interest on home equity lines of credit is now gone as of 2018, unlike with mortgages existing home equity lines were not grandfathered. The exception to this is for home equity debt that is specifically used for home improvement purposes.

7. Divorce 

For those couples contemplating divorce, the new tax law brings a huge change. For divorces finalized after 2018, the alimony payments will no longer receive a tax deduction for those making the payments. This will potentially make alimony payments more expensive for the paying spouse and could result in lower alimony payments for the spouse receiving them.

The implications are potentially huge for the spouse receiving the payments and could place many of them in an adverse financial situation going forward. For couples thinking about a divorce, they should consider finalizing the process in 2018 if possible.

The bottom line

These are just some of the changes contained in the new tax law. There are provisions impacting businesses large and small, as well as a number of other provisions impacting individuals in various situations. This is a good time to sit down with your tax or financial professional to see what impact the new rules will have on your taxes and your financial planning.

One thing to keep in mind. Most of the changes enacted by these new rules are set to expire after 2025, they aren’t permanent.

Not sure how the new tax rules will impact your financial planning? Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement and small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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4 Benefits of Portfolio Rebalancing

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Last year was a strong year for the markets, with the S&P 500 Index up almost 22% in 2017. The new year has started out a bit differently, though with the S&P 500 recording a gain of only 2.59% though the first half of 2018. It’s been a bumpy ride at times, with the markets experiencing some wild swings at times this year after peaking in late January.

The Russell 2000 index which tracks small cap stocks has hit new highs recently and many big tech stocks have done well so far in 2018. The uneven performance of the markets may have caused your portfolio to have strayed from its target asset allocation. You may be taking on more or less risk than is appropriate for your situation. If you haven’t done so, this is a good time to consider rebalancing your investments. Here are four benefits of portfolio rebalancing.

4 Benefits of Portfolio Rebalancing

Balancing risk and reward

Asset allocation is about balancing risk and reward. Invariably some asset classes will perform better than others. This can cause your portfolio to be skewed towards an allocation that takes too much risk or too little risk based on your financial objectives.

During robust periods in the stock market equities will outperform asset classes such as fixed income. Perhaps your target allocation was 65% stocks and 35% bonds and cash. A stock market rally might leave your portfolio at 75% stocks and 25% fixed income and cash. This is great if the market continues to rise but you would likely see a more pronounced decline in your portfolio should the market experience a sharp correction.

Portfolio rebalancing enforces a level of discipline

Rebalancing imposes a level of discipline in terms of selling a portion of your winners and putting that money back into asset classes that have underperformed.

This may seem counter intuitive but market leadership rotates over time. During the first decade of this century emerging markets equities were often among the top performing asset classes. Fast forward to today and they coming off of several years of losses.

Rebalancing can help save investors from their own worst instincts. It is often tempting to let top performing holdings and asset classes run when the markets seem to keep going up. Investors heavy in large caps, especially those with heavy tech holdings, found out the risk of this approach when the Dot Com bubble burst in early 2000.

Ideally investors should have a written investment policy that outlines their target asset allocation with upper and lower percentage ranges. Violating these ranges should trigger a review for potential portfolio rebalancing.

A good reason to review your portfolio

When considering portfolio rebalancing investors should also incorporate a full review of their portfolio that includes a review of their individual holdings and the continued validity of their investment strategy. Some questions you should ask yourself:

  • Have individual stock holdings hit my growth target for that stock?
  • How do my mutual funds and ETFs stack up compared to their peers?
    • Relative performance?
    • Expense ratios?
    • Style consistency?
  • Have my mutual funds or ETFs experienced significant inflows or outflows of dollars?
  • Have there been any recent changes in the key personnel managing the fund?

These are some of the factors that financial advisors (hopefully) consider as they review client portfolios.

This type of review should be done at least annually and I generally suggest that investors review their allocation no more often than quarterly.

Helps you stay on track with your financial plan 

Investing success is not a goal unto itself but rather a tool to help ensure that you meet your financial goals and objectives. Regular readers of The Chicago Financial Planner know that I am a big proponent of having a financial plan in place.

A properly constructed financial plan will contain a target asset allocation and an investment strategy tied to your goals, your timeframe for the money and your risk tolerance. Periodic portfolio rebalancing is vital to maintaining an appropriate asset allocation that is in line with your financial plan.

The Bottom Line 

Regular portfolio rebalancing helps reduce downside investment risk and ensures that your investments are allocated in line with your financial plan. It also can help investors impose an important level of discipline on themselves.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.